Overview of Franchise Industry

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Summary

With a thriving consumer population of over 300 million, coupled with sustained economic growth, India is anexciting destination for American franchisors. The Indian franchise industry offers excellent opportunities for newU.S. brands/franchisors. Increasingly, franchising is becoming a successful business model for foreign, especiallyAmerican companies, planning to enter the Indian market for the first time.

The $3.3 billion franchise market in India has the potential to grow to $20 billion by 2020, with an impressivegrowth rate of approximately 30% per year. Presently, there are 1,200 franchisors in India, of which 25% are ofinternational origin, with U.S. companies the most prevalent.

The Indian franchise operations have started expanding beyond the metropolitan centers into rural India. The topprospects for franchising include: food, education, retail, beauty salons/cosmetics, business services, apparel andtravel/tourism. This report will provide a generic overview of the Indian franchise industry and opportunities.

Market Demand

India is a rapidly changing country. The country is witnessing an unprecedented consumption boom. While therest of the world still faces the impact of the economic slowdown, India is growing at approximately 8% per year,the second fastest growing economy in the world. This rapidly growing economy has led to a population of over300-350 million middle-income Indians with high disposable incomes. This group continues to fuel theconsumption demand in India. The many factors that contribute to increasing consumption include the emergenceof a young urban elite population with increasing disposable income, changing lifestyles, mounting aspirations,penetration of satellite TV, increasing appetite for western goods, international exposure, options for quality retailspace, and greater product choice and availability. The greater demand for goods in India is in turn generating agreater demand for franchises.

The Indian population of one billion is growing at a rate of 2.5 percent per year. Of that total, about 300-350million have the demand for, and the discretionary income to purchase, premium products and services. Many inthe growing "middle income" segment look for international quality products and this trend is likely to continue forthe next five years and beyond sustaining the demand growth.

Market Data

The franchise market in India has the potential to grow to $20 billion by 2020. Franchising in India is growing atan impressive rate of approximately 30% per year. Presently, there are 1,200 franchisors in India, of which 25%are of international origin, with U.S. companies the most prevalent.

Best Prospects

India: Overview of Franchise Industry (FRA)

Mala VenkatJuly 2011

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Approximately 1200 franchisors, 40,000 franchisees spread across the country are successfully operating indiversified industry sectors including healthcare/beauty (3%), IT enabled services (14%), IT education (40%),Education -preparatory and fashion (10%), professional services (11%), retailing (9%), Entertainment (4%), F& B(2%), Cyber Cafes/Kiosks (2%), and miscellaneous services (5%).

Key Suppliers

Several foreign companies with strong brand names have established a presence in India through franchising. Inthe hospitality and food service industries, this has been the preferred method for starting operations in India.Some international companies that operate through franchises include: Hertz, Avis and Budget car rental;Radisson, Best Western and Quality Inn hotels; Kentucky Fried Chicken, Domino’s Pizza, TGI Friday’s, RubyTuesday, Subway, and Baskin Robbins for food. Pizza Hut and Domino’s Pizza have opened many outlets underthe franchise model. Similarly, Indian companies with strong brand recognition are also using the franchisingroute to expand business volume. Examples of such Indian companies are: Thomas Cook, Cox & Kings, Kuoni,SOTC, Raj Travels for travel and tourism, Euro Kids, Kidzee, Apple for pre- school, Café Coffee Day for food andbeverage and Apollo Hospitals for healthcare.

Prospective Franchisees

Local investors are very receptive to franchises from the United States. Technical knowhow, and dedication toadapting the franchise concepts, proven operational and marketing methods, and financial resources to maintainthe franchise over the long term, all aid in a franchise’s success. Quality, name recognition, standards, andinnovation all play a big part in the success of U.S. franchises with Indian investors. It is important that U.S.Franchisors choose the best franchisee not only for strong financial support, but also their capability to managethe system. Good master franchisee needs to know and understand clearly the franchise’s concepts such asproduct standardization, international outlook, standard operation manual, and training.

Market Entry

With the rapid growth of franchising in India, U.S. franchisors could appoint a master franchisee for the country,and with the assistance of the master franchisee, develop a franchise network. Alternately, the U.S. franchisorcould open a subsidiary in the country and develop the franchise network. The master franchisee will not only beresponsible for developing and adapting the foreign prototype to a new and different market in which it has limited

3%

14% 5%9%

11%2%10%

40%

4% 2%

Sector-wise Distribution Healthcare / Beauty

IT Enabled Services

Miscellaneous

Retailing

Business Services

Cyber Cafes/ Kiosks

Education - Preparatory / FashionEducation - IT

Entertainment

F&B

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recognition, but will also be responsible for implementing the expansion plan of the franchisor for the entirecountry. Given the large size of the country, U.S. franchisors are advised to appoint a regional master franchiseeto develop the network. Furthermore, it is vital to conduct thorough financial and legal due diligence or feasibilityreport on the potential partner, which includes a check on the owners, directors, financial status, and its availabilityto invest and expand the business.

Market Issues & Obstacles

The biggest challenge for the franchise industry in India is that the Government has not recognized it as a smallbusiness facilitator, unlike the United States. However, on December 16, 2009, the Government of Indiaannounced a liberalized policy, which removed the cap on the royalty payment and government approvals. Priorto this change, businesses were required to obtain approval for payments in excess of $2 million on one time feesand 5% on ongoing fees. With these hurdles cleared, more U.S. franchises will seek opportunities in India.

Challenges:

Regional Approach to combat Indian diversity: Local companies prefer to appoint master licensees on aregional basis (north, south, east and west), as India is a large geographical landmass with a diverse mix ofpopulation.

Expensive Real Estate: In the metropolitan centers of India, retail space continues to be extremely expensive.

Resistance on Fees & Royalty Payments: Indian potential franchisees believe that the U.S. franchise/royaltypayments are high.

Lack of Legal Framework: India does not have a comprehensive franchise law to regulate this industry sector.In fact, the Indian franchise venture needs to follow several laws to comply with the legal requirements in thecountry. The applicability of multiple laws to a franchise transaction poses problems of complexities andambiguities in agreements and is also time consuming for U.S. companies to decipher.

Despite these market impediments or constraints, U.S. franchisors thrive in India with strong prospects in varioussectors for the future.

Trade Events

To identify and recognize best practices in the business of franchising in India, the Franchise Association of India(FAI), and the MFV are organizing an exhibition cum seminar for the first time named India Franchise Expo in NewDelhi at Hyatt Regency, New Delhi. Please contact the show organizers for additional details.

www.mfvexpo.com/eblast/2011/India/Franchising_in_India.html

Resources & Contacts

Franchising Association of India: http://www.fai.co.in/Franchise Plus: http://www.franchise-plus.com/index.htmlFranchise Business: http://www.franchisebusiness.inIndian Brand Equity Foundation: www.ibef.orgReserve bank of India: http://www.rbi.org.inGovernment of India Ministry of Finance: http://finmin.nic.in/

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For More Information

The U.S. Commercial Service in Chennai, India can be contacted via e-mail at:mala.venkat@trade.gov; Phone:(91-44) 2857-4293; Fax: (91-44) 28574212; or visit our website: http://www.buyusa.gov/india

The U.S. Commercial Service — Your Global Business PartnerWith its network of offices across the United States and in more than 80 countries, the U.S. Commercial Service ofthe U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S.companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in theU.S. nearest you by visiting http://www.export.gov/eac.

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